There are many myths about bankruptcy, but one of the most common is that filing for bankruptcy will leave you unable to rebuild your credit. The truth is that bankruptcy can damage your credit score and your bankruptcy filing will stay on your credit record for seven to ten years after you file. However, rebuilding your credit is possible. How can you restore a strong credit score?
Rebuilding your credit starts with a loan or credit card.
After bankruptcy, it can be essential to build your credit payment history. While filing for bankruptcy can make it difficult to obtain a credit card, there are options available to you. These loans or credit lines include:
- Secured credit cards—Secured credit cards use a pre-paid deposit to back the line of credit. Because these cards usually involve significant fees and high interest rates, Forbes recommends rebuilding your credit using these cards only until your score has improved.
- Secured loan—By using deposited money or an asset like your car as collateral, you can use a secured loan to borrow funds. As Experian notes, because your loan is backed by collateral, it is often easier to apply for when you have a low credit score.
- Co-signed credit cards or loans—If you are unable to get a credit card or loan on your own, having a family member co-sign your card or loan allows you to benefit from their high credit score. They will, however, be responsible for your debts if you cannot pay them.
Because of the challenges involved, it is usually best to use these loans or lines of credit only until you have built your credit score enough to apply for traditional options. Traditional credit cards usually have lower fines and fees and lower interest rates, decreasing your debt in the long run.
How should you use these credit cards or loans?
Getting a line of credit is only the first step to rebuilding your credit. Once your application has been accepted, you need to keep the balance on this credit low. You will also need to make your required payments on time. Paying your balance in full can be especially helpful because it prevents you from accruing further debt.
While bankruptcy can have a significant impact on your credit score, it is possible to rebuild your credit and create a stronger financial future.